On the Issues: Housing

Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies now being bailed out by the government, used their implicit guarantees of federal support to take risks that proved excessive and led to their collapse. But the vast bulk of subprime mortgages that fueled the underlying crisis were financed by their private sector rivals.

Most experts agree that lax regulation was part of the problem. The Federal Reserve, after years of refusing to clamp down on deceptive mortgages, admitted as much this year when it began drastically tightening its rules. Senator John McCain’s $300 billion proposal to buy up these mortgages and the administration’s bailout plan have both been criticized as too lenient toward irresponsible banks and Wall Street firms; proponents say that what matters is ending the crisis.

Barack Obama

Democrat

U.S. Senator

John McCain

Republican

U.S. Senator

Senator Obama traces the crisis to lax government regulation both of mortgage lenders, which allowed them to make deceptive loans that homebuyers could not afford, and of Wall Street firms and banks that bought bad loans and repackaged them as securities.

Senator McCain says the causes of the credit crisis include irresponsible lenders and greedy Wall Street firms, as well as the unchecked growth of Fannie Mae and Freddie Mac.

Immediate Proposals

Support the current $700 billion rescue package for financial institutions and President Bush’s decision to inject $250 billion directly into banks.

Give bankruptcy judges the power to modify and reduce mortgages for homeowners on primary residences.

Enact a $60 billion economic stimulus package that would include $1,000 tax rebates and money to develop renewable energy sources and public infrastructure like highways, mass transit, bridges and schools.

Enact a 90-day moratorium on most home foreclosures, requiring financial institutions that take government help to agree not to act against homeowners who are trying to make payments, even if not the full amounts:

“If you are a bank or lender that is getting money from the rescue plan that passed Congress, and your customers are making a good-faith effort to make their mortgage payments and renegotiate their mortgages, you will not be able to foreclose on their home for three months.”

Direct the Treasury and the Department of Housing and Urban Development to work with state housing agencies and coordinate “broad mortgage restructurings.”

Stabilize Fannie and Freddie, break them up and sell them back to the private sector.

Have the government buy up $300 billion worth of subprime mortgages directly from financial institutions for homeowners who have fallen delinquent or face huge increases in payments when their teaser rates expire. The Treasury would then refinance homeowners with new, fixed-rate, government-guaranteed mortgages at the homes’ reduced value.

Homeowners must be able to “prove their creditworthiness at the time of the original loan” to be eligible under the plan. Part of the $700 billion “provided by Congress in recent financial market stabilization bill can be used for this purpose.”

Enact $52 billion worth of new tax cuts to jump-start the economy, including a reduction of the capital gains tax by half, to 7.5 percent, and a reduction of the tax on retirees’ withdrawals from pension funds, to 10 percent.

Establish a commission to recommend regulatory reforms.

Long-Term Proposals

Allow 10 percent refundable tax credit on mortgage interest for taxpayers who do not itemize deductions and therefore cannot benefit from current mortgage deductions, modeled on a deduction “now predominantly used by high-income itemizers.”

Tighten laws against mortgage fraud and abusive lending practices. Increase financing for enforcement. Set tougher criminal penalties for fraudulent brokers and lenders. Create a fund — partly paid for by “increased penalties on lenders who act irresponsibly” — to help people avoid foreclosures.

Require lenders to provide simpler disclosures of loan costs and interest rates, with a standardized scoring system to quantify the borrower’s obligation.

Says any federal assistance for borrowers “must be temporary” and “should be focused solely on homeowners, not people who bought houses for speculative purposes, to rent or as second homes.”

Adopt policies to ensure that homeowners “provide a responsible down payment of equity at the initial purchase of a home.” Opposes reducing the down payment requirement for Federal Housing Administration mortgages; believes the requirement should be increased “as conditions allow.”

Wanted to let eligible homeowners apply to Federal Housing Administration to replace their existing “burdensome” mortgages for a F.H.A.-guaranteed “manageable loan that reflects their home’s market value. ... Homeowners would end up with a 30-year mortgage and an equity stake in their home. The new lender would receive a federal guarantee of the mortgage. And the taxpayer gets a benefit if the sale value ever recovers.”

Wanted to convene meetings with accounting professionals and top mortgage lenders. Said lenders should work together “to provide maximum support and help to their cash-strapped but credit worthy customers.”